Saving Social Security From Its Saviors

As a result of the collapse of the housing bubble and the resulting economic downturn, Social Security is more important than ever. Already, two thirds of people age 65 rely on it for more than half their income. With traditional pensions disappearing and many near retirees losing much or all of the equity in their home, and also seeing 401(k) assets plummet, the next generation is likely to be even more dependent on Social Security.

Fortunately, the program is fundamentally solid. While you can sound really smart in Washington by saying that Social Security is going bankrupt, the facts say the opposite. According to the Social Security trustees’ report, if we did absolutely nothing the program could pay every penny of scheduled benefits through the year 2036.

Even if we never did anything, Social Security could always pay near 80 percent of scheduled benefits. While it would be unacceptable to pay people a smaller benefit than had been promised, the scheduled benefits for new retirees are projected to rise by 1 percent a year in excess of prices. This means that in 2036, the average scheduled benefit for a new retiree will be more than 25 percent higher than it is today.

If new retirees in 2036 got just 80 percent of their scheduled benefit they would still be receiving a benefit that is larger than what retirees get today. This assumes that no changes are ever made to shore up Social Security’s finances. In other words, there is no plausible story in which our children or grandchildren will have to worry that there won’t be anything there for them.

There is a lot of other nonsense being circulated about Social Security. Many opponents of Social Security insist that its $2.6 trillion trust fund does not exist or that it is “just sheets of paper.” The trust fund is held in the form of U.S. government bonds, which are indeed sheets of paper. However, investors everywhere eagerly seek out these “sheets of paper” as the safest asset in the world.

Other opponents of Social Security have been known to hyperventilate about the fall in the ratio of workers to retirees and the increase in life expectancy. Actually, the trustees know about the fall in the ratio of workers to retirees. This is incorporated into their projections.

They also know about life expectancy. The impact of the increase in life expectancy is often exaggerated, since much of it is due to a drop in infant mortality, not people living later in life. It also is worth noting that the gains in life expectancy in recent decades have mostly gone to the wealthier half of the population, with ordinary workers seeing little gain. And, we have already increased the retirement age by two years to take this into account.

In spite of the claims of the hysterics, the longer-term gap in Social Security is relatively modest. The Social Security tax only applies to the first $107,000 of wages. If the tax applied to all wages, so that Bill Gates paid more than a senior firefighter, it would fill the gap in full. So this shortfall is not some huge chasm. It can be relatively easily met, and there is no rush to do it.

In short, Social Security is a great program that does exactly what it was supposed to do. It provides a core retirement income as well as insurance against disability and support for survivors. It has extremely low administrative costs and little fraud. The only problem is the politicians who say they want to save it.